Monika Mitchell has recently completed her upcoming book: " Conversations with Wall Street: How to fix the financial system from inside the industry that broke it " due out in ebook Summer 2011 and print Fall 2011.
It is really all in the way you think about it. Is it murder or justice? Debt or equity? Budget deficit or moral deficit?
As we struggle with the do's, dont's and maybes of the continuing financial reform debate, pearls of wisdom come from the strangest places. Last week's press conference with John Travolta, John Gotti Jr. might be assumed an unusual source to derive insight. Yet Gotti Jr.'s words as he sat next to a botoxed Lindsay Lohan and Sister Victoria were profound.
For some reason this moving testimony from a devoted son to his misunderstood Pa reminds me of the ongoing financial reform war. The current battlefields are fought on the same issues that created the global economic crisis. Monitoring derivatives, credit ratings, capital rules, and "too big to fail" banks has kicked up another firestorm. Only three years after Bear Stearns crashed and burned under the weight of its recklessness, lawmakers are claiming that regulations to prevent another crisis are unnecessary.
Republican Senator Jim DeMint introduced "The Financial Takeover Repeal Act of 2011" in an attempt to abort the nine-month old Dodd-Frank financial regulation bill before it is born. DeMint said, "We must repeal the Democrats' takeover of the financial markets that favors Wall Street corporations, over-regulates small businesses with massive new bureaucracy and hurts consumers." The 2300 page law attempts to rein in proprietary trading, re-establish capital limits and fiduciary responsibility for executives and institutions, create transparent exchanges for swaps and derivatives--and hardly favors Wall Street.
Dodd-Frank by its sheer size does look like a bureaucratic nightmare, but after the events of 2008, there wasn't a whole lot of choice. The bill also establishes a state-of-the-art consumer financial protection bureau (the first of its kind) headed by none other than consumer hero herself, Harvard law professor, Elizabeth Warren.
Meanwhile, back at the ranch"the Democratic Senate that is, lawmakers take heat from both Tea Party Revelers and Wall Street Ranters. Jamie Dimon, CEO of the one of the largest "Wall Street corporations" on the planet, JPMorgan-Chase-me-if-you-can, says that the U.S. still has the "best financial system in the world" and Dodd-Frank is poised to "destroy that." Dimon railed against derivatives regulations threatening if the government imposes any conditions at all on derivatives trading he might pick up his swap-marbles and bring them oversees.
In Mr. D's own words, "If I can't offer you a foreign exchange swap or credit derivative at a price that you like, you will do it elsewhere. And that could be Singapore I guess he means it. I have heard Singapore is an amazing city even you if you can be jailed for writing a book.
Yet a brief chat with the CEO of a $14billion hedge fund based in New York warns, "We better fix it (regulate) with derivatives or that will blow us all up."
So who are we to believe? Will regulation safeguard the financial system or destroy it?
How we got here :
Only a few short years ago, a free-market evangelist in the form of Federal Reserve Chairman Alan Greenspan waxed rhapsodic over the poetry of economic anarchy claiming deregulation was the path to prosperity. Warren Buffett, arguably the most successful investor in the modern world, warned Mr. Greenspan of the dangers of unrestrained risk in exotic derivatives like Collateralized Debt Obligations (CDOs).
Buffet explained the reason that he refused to trade these products: "You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you're going to understand that CDO, you've got 50-times-300 pages to read, it's 15,000. If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you're now up to 750,000 pages to read to understand one security."
Greenspan would allow no one to rain on his parade and dismissed old Warren's fears. Testifying before the U.S. Senate Banking Committee in 2003, the Fed Chair said, "What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so."
Dispersing risk is another way of saying "moving it off your books" onto someone else's books. The chief economist in the United States was encouraging market makers to pour trillions of dollars worth of toxic debt directly into the financial system. This "transfer" became the risk management tool of choice and ultimately contaminated the U.S. and global economies. It's like playing "hot-potato" with a three trillion dollar grenade. Okay, so you know this already. Why cry over spilled milk? Very simply, because the milk is still not cleaned up.
He's back . He is not exactly "back," but Alan Greenspan will not leave us alone. His latest diatribe against financial regulation is being used by lawmakers to support repealing reform. I admit there was a time when I was smitten by the deregulator's indifferent and seemingly sound brilliance. But we are all so foolish when we are young"
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